Businesses seek to maximize the value they can obtain from their revenue models. Price is the key lever decision-makers can operate to influence revenue, and in recent years a growing number of businesses have sought to implement strategies for actively managing the price lever – strategies such as demand management and revenue optimization. However businesses are also highly sensitive to the perception by individual consumers and the society at large that their prices are fair, in other words that they do not violate widely held individual or societal norms. Fair pricing matters – it matters to me, and to you, and perhaps ever more so in a climate characterized by economic uncertainty, downward pressure on demand and a perceptible decrease in the citizenry’s trust of public and private institutions.
Fortunately for business decision-makers, fair pricing and optimal pricing are not at odds with each other but can comfortably coexist. Over the course of the coming weeks my colleagues at Sentrana and I will be approaching the rich topic of fair pricing in a series of exchanges on this blog.
What is a fair price? This question has perplexed humanity throughout history. Leading thought output of the ages, from Aristotle’s Nicomachean Ethics to the Summa Theologicae of Thomas Aquinas, Pierre de Fermat’s probability proofs and Adam Smith’s classsical economics, have all weighed in with considered opinions on the fairness and justness of alternative ways to price economic goods and services, and the debate continues today. A series of letters exchanged between Blaise Pascal and Pierre de Fermat in 1654 is often regarded as a primal cause of the development of modern probability theory: this exchange was actually an attempt to establish a scientific basis for the notion of fair price. In his paper “The Unity and Diversity of Probability” Rutgers professor Glenn Shafer shows how these letters created hypothetical games of value that we today can recognize as the application of probability methods to defend a price as ‘fair’ under conditions of uncertainty. Continue reading